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Rethinking Underinsurance: From Indexing To AI-Powered Accurate Pricing

June 20, 2023
Spotr underinsurance rebuild valuation
A roof damaged by a storm

The issue of underinsurance for buildings is intensifying for insurance companies, fueled by rising inflation rates, supply chain disturbances, and labor shortages that are propelling the cost of reconstruction. An increasing number of businesses and individuals are finding themselves insufficiently insured, leading to potential risks for both the policyholder and the insurer. Spotr, leveraging AI-powered building inspection technology, offers an innovative approach to automatically detect and address underinsurance by providing rebuild valuations at scale, helping clients stay protected in the face of unforeseen circumstances.

Underinsurance as a critical concern

Underinsurance is a critical concern that has increasingly demanded the attention of insurance companies over the past few years. It arises when the insurance coverage obtained by policyholders falls short of adequately covering the costs associated with rebuilding, repairing, or replacing insured assets after a claim. This can result in substantial financial losses for claimants, as insurers often apply the 'Condition of Average' to reduce claim settlements proportionate to the extent of underinsurance. In severe cases, insurers may even void policies due to inaccurate valuations provided by the insured party.

Rebuild valuations play a vital role in addressing the challenges associated with underinsurance. These valuations serve as a critical tool for accurately determining the costs involved in rebuilding insured assets following a claim. Conducting thorough and precise rebuild valuations helps to minimize the risk of underinsurance and provides policyholders with sufficient protection against potential financial losses.

Understanding the sharp rise in underinsurance

The issue of underinsurance has seen a steep rise over the past two years, influenced by a multitude of factors:

1. Rising inflation rates

As the value of goods and services rise rapidly, insurance policies that may have been sufficient just a few months ago might now be inadequate. This can apply to various types of insurance, including property, asset, and business interruption.

2. Supply chain disruptions

Supply chain disruptions have resulted in a global shortage of critical materials and machinery, thereby extending delivery timescales. These bottlenecks can cause businesses to experience longer downtime after serious incidents, leading to prolonged operational delays and significant economic impacts from lost revenue.

3. Inaccurate original rebuild valuations

A critical concern lies in the accuracy of the original rebuild valuations, calculated at the start of the policy. Policies often extend over prolonged periods, originating from a time when data hygiene may not have been as refined as it is today. Consequently, there is a lack of confidence in the original rebuild calculation upon which subsequent adjustments are indexed.

4. Inaccurate rebuild valuations due to recent building changes

An even greater concern arises from the changes occurring within the properties themselves. For instance, consider the installation of new solar panels on a roof or the addition of buildings to a plot, be it in commercial or private lines. These changes, big or small, often go unadjusted or were incorrectly recorded in insurance systems, leading to significantly lower rebuild valuations and leaving customers exposed to underinsurance.

Spotr underinsurance rebuild valuation
Recent changes detected in buildings over a period of 5 years

The ripple effects of underinsurance are profound and far-reaching. When the time comes to make a claim, policyholders often find that their payouts fall disappointingly short of their needs, leaving them not only financially strained but also emotionally distressed. This dissatisfaction may even prompt them to switch to other insurers who can offer the comprehensive coverage they genuinely require, thereby challenging the very essence of insurance — standing by individuals during their times of need.

But the problem extends beyond dissatisfied customers. Consider a scenario where a devastating storm strikes, wreaking havoc on countless underinsured homes. The financial risks to our entire society become immense, amplifying the urgency to address this issue head-on. We cannot afford to overlook the implications of widespread underinsurance, as it poses a threat to the stability and resilience of our communities.

Beyond indexing: the limitations in combatting underinsurance

The battle against underinsurance is intensifying, as the insurance industry takes decisive measures to address this pressing issue.

The most commonly employed approach is the usage of indexing to ensure policy coverage keeps pace with inflationary trends. However, it is crucial to acknowledge that indexing alone does not fully address the issue of underinsurance due to a number of reasons. Initially, it neglects to incorporate essential elements such as property modifications or incorrect initial rebuild estimates, both of which can considerably affect the sufficiency of coverage. Furthermore, the use of indexing can foster a sense of scepticism among customers. They may perceive insurers as exploiting inflationary trends to boost their profits, especially when the insurers cannot substantiate the new indexation methodology with robust data.

Another approach is to create awareness among customers about the risks of underinsurance. However, the effectiveness of these efforts is often hindered by low customer engagement. Moreover, the system is not foolproof, as customers often struggle to fully comprehend and accurately fill in important details, such as confusing market valuation with rebuild valuation.

Stop indexing, start pricing accurately for every customer

While steep indexation and spreading awareness among customers seems like a logical approach, it alone cannot eradicate the underinsurance gaps that persist within portfolios. It is not a foolproof system and leaves room for potential shortcomings. Fortunately, a viable solution exists—the key lies in fair pricing supported by accurate data.

By leveraging accurate and up to date rebuild valuations of each property in their portfolio every year, insurers can proactively engage with customers and ensure their coverage aligns precisely with their needs. This approach not only eliminates any unwelcome surprises during the claims process but also safeguards against the risk of customer dissatisfaction. As we know, a negative claims experience can be the turning point for customers, leading to potential loss of trust and loyalty.

The crux of the matter lies in obtaining the right data. By utilizing accurate rebuild valuations, insurers can secure a solid foundation for fair pricing, ensuring that policyholders receive adequate coverage without overpaying or facing the risks of underinsurance. This data-driven approach empowers insurance companies to tailor their offerings to individual customer requirements, bolstering customer satisfaction and loyalty while minimizing the possibility of underinsurance gaps.

Spotr underinsurance rebuild valuation

Spotr's AI-powered process for detecting underinsurance

Spotr offers an AI-powered, data-driven solution to automatically detect underinsurance and help clients stay protected. By calculating up to date rebuild values for each property in the portfolio, insurers can identify under- or overinsured properties, enabling them to advise clients accordingly and gain a comprehensive understanding of portfolio risks. Spotr's process involves analyzing satellite, aerial and street view images to label building elements, assess conditions, materialization, and identify risks and opportunities. By scoring and evaluating the data, Spotr empowers insurers with an unprecedented understanding of underinsurance within the portfolio.

Spotr has established partnerships with prominent insurers across Europe to effectively address underinsurance, leveraging its globally scalable platform. Spotr employs computer vision technology to analyze a large volume of regularly updated images, allowing us to extract unique data such as square meters, building condition and number of floors at scale. For further insights into the data points we generate, please reach out to our team.

Time for decisive action

As the insurance industry grapples with the growing concern of underinsurance, it is crucial for insurers to take decisive action. By leveraging accurate data and rebuild valuations, insurers can play a pivotal role in addressing this issue and safeguarding their clients' financial security.

Spotr's AI-powered solution empowers insurers to automatically detect underinsurance and provide clients with the protection they truly need. With this approach, insurers can proactively identify under- or overinsured properties, offer tailored advice to clients, and gain a comprehensive understanding of portfolio risks. This helps insurers build stronger relationships with clients, enhance customer satisfaction, and foster resilience in the face of unforeseen circumstances.

Together, we can pave the way towards a more secure and resilient insurance landscape, fulfilling the core purpose of insurers - to be the safety net that supports people and communities in their most challenging moments.

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